The Mercedes factory will be built in Iracemapolis, about 170 kilometers (105 miles) northwest of Brazil's financial hub of Sao Paulo and be completed in 2016, the division of Daimler said in a statement Tuesday. It will assemble the next versions of the C-Class sedan and GLA compact sport-utility vehicle.

"Brazil is an important future market," Andreas Renschler, Daimler's head of car and van production, said in the statement released after he and Brazilian President Dilma Rousseff signed a framework contract. "With our local production we accept the challenge and take on the competition."

Mercedes and Volkswagen's Audi are restoring car production in Brazil, and BMW is starting assembly there, as the three German manufacturers seek to bypass high import taxes limiting delivery growth. The agreement with Stuttgart-based Daimler is part of Rousseff's strategy to boost manufacturing in Brazil, South America's biggest economy, to bolster gross domestic product in advance of elections in 2014.

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"The political and economic environment seems to be stabilizing in Brazil," Frank Biller, a Stuttgart-based analyst at LBBW, said by phone. "With the more positive circumstances, it seems that the carmakers can make good business with a local production. The 2014 soccer World Cup and 2016 Olympic Games will add to a positive sentiment" among consumers in the country, which is hosting the sporting events.

The light-vehicle market in Brazil will grow 4.5 percent on average from 2012 to 2016, with higher growth rates starting in 2014 after weaker demand this year, according to Biller's estimates.

Daimler Chief Executive Officer Dieter Zetsche has vowed that Mercedes will reclaim the No. 1 position in global luxury- auto sales by the end of the decade after losing the top spot to Munich-based BMW in 2005 and second place to Audi in 2011. Expansion includes a 2 billion-euro project to double Mercedes production in China to exceed 200,000 vehicles.

The Brazilian plant will have capacity to make as many as 20,000 cars and SUVs a year, Daimler said Tuesday. About 1,000 jobs will be created at the site, in addition to 3,000 new posts at suppliers.

Daimler, also the world's largest truckmaker, converted its sole Brazilian car plant, located in Juiz de Fora in the state of Minas Gerais, to assemble commercial vehicles starting about two years ago, adding capacity for the Mercedes heavy-duty truck Actros. Audi halted car production in Brazil in 2006.

The proximity of the Iracemapolis plant to Daimler's truck factories in Sao Paulo state and Minas Gerais will allow "exchange possibilities" for workers, Philipp Schiemer, head of Daimler's Brazil business since June, said in the statement.

The German luxury-vehicle manufacturers' expansion outside Europe is targeted at markets where auto sales are increasing, making up for slack demand in the carmakers' home region, where car sales are set to slump for a sixth straight year. Their moves into Brazil come as the country's government and central bank grapple with managing borrowing costs, exchange rates and trade to maintain economic growth without stoking inflation.

"The Brazilian market is quite sealed off," Heinz Gottwick, a Daimler spokesman, said by phone. "The local production helps us offer our vehicles on reasonable terms."

BMW plans to start production in Brazil's southern state of Santa Catarina next year and is investing 200 million euros in the new facility. The manufacturer has a target of assembling at least 30,000 vehicles in Brazil annually.

Audi said last month that it will invest 500 million reais ($225 million) in Brazil through 2016. A new plant in Sao Jose dos Pinhais in the state of Parana will start making the A3 sedan in 2015, followed by the Q3 SUV in early 2016. The Ingolstadt, Germany-based company has a target of selling 30,000 cars in Brazil by 2018, including imported vehicles.

The carmaker's production plans in Brazil are in addition to a $1.3 billion SUV factory in Mexico that's scheduled to start operating in 2016.